Company Constitution or the Companies Act Default? What You Inherit by Skipping It

The Companies Act 2016 made the company constitution optional, and the entire industry translated that into “you don’t need one”.

What it actually means is that if you do not write the rules, the Act writes them for you. Section 31(3) is explicit: if a company has no constitution, the company, each director and each member have the rights, powers, duties and obligations as set out in this Act.

You are not unregulated. You are on defaults. Most founders have never read them.

The rule itself

Section 31(1): a company, other than a company limited by guarantee, may or may not have a constitution. A company limited by guarantee must have one.

Section 32(1): a constitution is adopted by special resolution, and lodged with the Registrar within thirty days (s.32(4)). Failure to lodge carries a fine up to RM50,000 plus up to RM500 a day.

Section 32(2) is the boundary: a constitution has no effect to the extent that it contravenes or is inconsistent with the Act. A constitution modifies what the Act allows to be modified. It cannot rewrite the Act.

If your company was registered before 2016

You almost certainly have one. Section 34(c) provides that for a company registered under the corresponding previous written law, the constitution is the memorandum and articles of association as originally registered or as altered, including subsequent alterations under s.36 or s.37.

Older companies did not become constitution-free when the 2016 Act commenced. They carry an M and A drafted under a repealed statute, often containing an authorised capital clause and a par value that no longer exist in law. That is worth a read.

What you inherit if you skip it

This is the section nobody writes. Here is the default rulebook, provision by provision.

Question	Default rule with no constitution	Section
Who runs the company	The business and affairs are managed by, or under the direction of, the Board, which has all necessary powers	s.211
How the Board meets and decides	The Third Schedule governs Board proceedings	s.212
Appointing more directors	Subsequent directors by ordinary resolution; the Board may appoint additional directors on the terms of appointment	s.202
Removing a director	A private company director may be removed by ordinary resolution — a simple majority	s.206(1)(a)
Director retirement by rotation	Section 205 applies unless the constitution or terms of appointment say otherwise; a private company may settle it by written resolution	s.205
Rights attaching to shares	Every ordinary share carries one vote on a poll, an equal share of dividends authorised by the Board, and an equal share of surplus assets	s.71
Classes of shares	The full statutory menu is available — different classes, redeemable, preferential, limited or no voting rights	s.69
Issuing new shares	Directors need prior members’ approval by resolution before allotting, with limited exceptions	s.75
Dilution protection	New shares ranking equally must first be offered to existing holders pro rata	s.85
How members decide	A private company may pass written resolutions; where the Act does not specify, an ordinary resolution suffices	s.290
Annual general meeting	Not required — s.340 applies only to public companies	s.340

Read the s.85 line twice. Statutory pre-emption applies by default. If you have no constitution and the company issues new shares that rank equally with existing ones, they must first be offered to existing shareholders in a way that preserves their relative voting and distribution rights.

The irony is worth stating plainly: skipping the constitution gives minority shareholders a protection that a professionally drafted, investor-favourable constitution frequently disapplies, because s.85 opens with the words subject to the constitution. Founders often think adopting a constitution makes them safer. It depends entirely on who drafted it.

The gap the default does not fill

Section 42(2): a private company shall restrict the transfer of its shares. That is a mandatory characteristic of the form.

But the Act does not tell you how. The restriction mechanism — board discretion to refuse a transfer, a pre-emption right on transfer, tag-along or drag-along, valuation on exit, what happens when a shareholder dies or leaves — is conventionally set out in the constitution. Without one, a company that is required to restrict transfers has no articulated machinery for doing it.

That is the real cost of skipping. Not that the company is ungoverned day to day, but that the moment somebody wants out, dies, divorces, or falls out with a co-founder, there is no agreed procedure and no agreed price.

When a constitution earns its cost

The honest answer for a single-shareholder, single-director company is: rarely. The statutory default is coherent, and a bespoke constitution is a cost with no counterparty to protect you from.

It starts earning its cost when any of these are true:

• Two or more shareholders. Especially an uneven split, and especially 50/50, where the default gives you no deadlock mechanism at all.
• You want share classes with different rights. Founder shares with weighted votes, non-voting shares for family members, preference shares for an investor.
• You need to restrict how the board is composed. A right for a particular shareholder to appoint a director survives only if it is written down; the default is removal by simple majority under s.206(1)(a).
• You want to modify or exclude pre-emption. In either direction — s.85 is subject to the constitution.
• An investor requires it. Term sheets routinely require a constitution reflecting agreed governance before completion.
• You are protecting against a specific event. Death, incapacity, a founder leaving, a shareholder becoming bankrupt.

Constitution or shareholders agreement?

They do different jobs and the choice is not either-or.

The constitution is lodged with SSM and is a public document. It binds the company and its members as if signed and sealed by each member (s.33(1)). It works on the company’s own machinery — resolutions, transfers, share rights.

A shareholders agreement is private and contractual. It binds the parties who sign it, can cover commercial matters the constitution cannot reach, and is not visible to competitors, customers or counterparties reading your file at SSM.

Where they conflict, the constitution controls the company’s internal machinery, and the agreement gives the signatories contractual remedies against each other. Serious arrangements usually use both, drafted together so they say the same thing.

What it costs to change your mind later

Mechanically, very little. Adoption is a special resolution and a lodgement; SSM’s published table shows RM30 for a constitution amendment.

Practically, it is expensive, and the expense is not the fee. A special resolution needs 75%. While everyone agrees, that is a formality. Once someone has a reason to object — usually the exact moment you discover you need a constitution — it becomes a negotiation conducted from a weak position.

That asymmetry is the whole argument for deciding at incorporation.

Common mistakes

• Reading “optional” as “unnecessary”. Section 31(3) hands you a complete default rulebook that most founders have never opened.
• Assuming no constitution means no pre-emption. Section 85 applies by default; it is the constitution that can take it away.
• Copying a constitution from another company. A constitution that contradicts the Act has no effect to that extent under s.32(2), and an inherited investor-favourable clause may be doing something to you that it was drafted to do to someone else.
• Old companies ignoring their M and A. It is your constitution under s.34(c), authorised capital clause and all.
• Forgetting the 30-day lodgement. Sections 32(4) and 36(3), with fines up to RM50,000 and RM10,000 respectively plus daily amounts.
• Adopting a constitution and stopping there. It does not cover commercial matters between shareholders — funding obligations, non-competes, salary and role. That is the shareholders agreement’s job.

What’s next

If you are a sole owner, note the defaults and move on. If there is more than one shareholder, the questions to answer before anything gets drafted are: what happens when one of us wants out, who decides the price, and what breaks the tie.

Then decide whether those answers belong in a constitution, a shareholders agreement, or both.

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Verification status. AI-assisted draft, not yet reviewed by a subject-matter expert. Statutory references are to the Companies Act 2016 (Act 777) as published by SSM. This is a description of the statutory default, not advice on a particular shareholding arrangement.